12 Dec 2025
The paper “Option Price Asymmetry, Speculation and Stock Short Sale Cost”, co-authored by Dr Yuanyi Zhang, Assistant Professor at International Business School Suzhou (IBSS), Xi'an Jiaotong-Liverpool University (XJTLU), has recently been published in the Journal of Banking and Finance, an ABDC A*-ranked journal. Focusing on the informational value of the options market, the study offers a fresh empirical way for predicting future returns using information embedded in option prices.
In recent years, as regulatory changes have reduced transaction costs, the global options market has grown rapidly: trading volume rose from 4.9 billion contracts in 2019 to 9.87 billion in 2021, effectively doubling in scale. This expansion has generated a rich, high-frequency dataset covering different strike prices and maturities. However, a core challenge for investors and institutions has been how to systematically decode the information implicit in these prices to gain an edge in predicting market movements.
To address this challenge, Dr Zhang’s team innovatively proposed the Implied Volatility Asymmetry (IVA) indicator. Calculated as the weighted difference between the implied volatilities of out-of-the-money (OTM) call options and OTM put options, this indicator accurately quantifies the relative demand for bullish (call) and bearish (put) options. In simple terms, it reflects the difference in price pressure between the two types of options, providing a quantifiable analytical tool for interpreting market information.
The study reveals a key correlation between the IVA indicator and option returns: when IVA is high (indicating stronger demand for OTM call options), the future returns of those call options tend to be lower. This pattern occurs because speculative, uninformed buying drives option prices up, making them expensive and prone to later` price corrections. Conversely, when IVA is at a low (indicating stronger demand for OTM put options), the future returns of those put options are also relatively low. Here informed traders are willing to pay a premium for protective or bearish put options, so options that look seemingly "low-cost to open" can in fact be overpriced, limiting their return potential.
These findings holds significant practical value for quantitative trading and risk management. On one hand, quantitative strategies can use IVA as a signal to identify overpriced options, enabling the development of mean-reversion or relative-value trading strategies (e.g., selling overpriced high-IVA call options, or designing spread portfolios to profit from pricing discrepancies). On the other hand, the negative correlation between put options and IVA means that low IVA levels can serve as a key indicator of informed trading activity in the put option market, providing a new lens for reading market sentiment and flagging potential risks at an early stage.
As an empirical study that moves beyond the constraints of traditional theoretical pricing models, the core contribution of this research is to provide a tool that can be applied directly in real markets. The IVA indicator not only helps investors interpret speculative sentiment and informed trading behavior but also directly optimises trading performance and improves risk management strategies, injecting new impetus into the efficient operation and rational decision-making of the options market.
Dr Yuanyi Zhang obtained her Ph.D. in Finance from Louisiana State University. Her research explores retail traders' behavior in options, spillover effects in option pricing, and how information in options markets is conveyed to the stock market.
Journal of Banking and Finance is one of the leading journals in the field of finance. It publishes theoretical and empirical research covering all major research areas of finance and banking, with a particular focus on: theoretical innovations and their applications in banking and other domestic and international financial institutions and markets; empirical studies; applied research; and policy-oriented work.
12 Dec 2025